Decision Analysis Task 3 Essay

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MEMO Shuzworld Recommendations 12/3/2012 Consultant A. Recommend which method (i.e., using reconditioned equipment, purchasing new equipment in its Shanghai plant, or outsourcing to another manufacturing operation) Shuzworld should use for the manufacturing of its sneakers, utilizing the appropriate decision analysis tool. Shuzworld has decided to produce the Samba Sneaker, a bright colored shoe marketed for teens and pre-teens. The company needs to decide which would be more economical: reconditioning their existing equipment for this production, buying new equipment, or outsourcing the production to China. Reconditioning has a fixed cost of $50,000 and a variable cost of $1,000 for every 1,000 sneakers produced.…show more content…
According to the calculations: It will cost a total of $1.5 million dollars to recondition the equipment ($50,000/ fixed and $1 million/variable). Purchasing new equipment will cost $700,000 ($200,000/fixed and $500,000/variable). This is half of what it would cost to recondition old equipment. Outsourcing will cost $3 million ($0/fixed and $3 million/variable), which is twice the amount of reconditioning the old equipment and 4 times the amount of making a new purchase. These calculations can now be used to determine the breakeven volume for Shuzworld’s options. The data above states that the breakeven volume for reconditioning versus buying new equipment is 300 units. The breakeven volume for reconditioning versus outsourcing is 25 units, and the breakeven volume for buying new equipment versus outsourcing is 80 units. Looking at the graph, it becomes apparent that if the demand for Samba Sneakers is between zero and 25 units, that outsourcing would be the best option. If the demand is between 25-300 units, reconditioning the equipment becomes the optimal choice. Buying new equipment becomes the best choice if the company has a demand over 300 units. This means that the best option for the company will be determined by their demand. The company has given no indication of the amount of demand they expect to see, so a “best guess” scenario will have to be applied. It is unlikely that they will see a very low demand (less than 25 units),
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